Small-Business Butterflies Can Create Wave of Trouble

Small things matter. The flapping of a butterfly’s wings can trigger a tidal wave halfway around the world.

The actions of one small business may have only a local impact. But when the actions are repeated by thousands of firms across the economy, the consequences can be very large.

That is why the recent cautious tone among small-business owners merits attention. Of course, in this case, the correct metaphor is that thousands of small-business butterflies aren’t flapping their wings at all. The lack of an entrepreneurial breeze will hold back growth and hiring.

The latest bad news from the small-business sector was the weak reading of the September National Federation of Independent Business confidence index. The index slipped 0.1 point to 92.8, and the readings on current and future job creation both deteriorated.

Recent surveys done by PNC Financial Services Group and by Dun & Bradstreet Credibility and Pepperdine University also report a worsening attitude among small firms.

The becalmed impact is most evident in the wait-and-see attitude on jobs. The D&B survey showed 40% of small businesses have no plans to hire additional employees. The PNC autumn report showed only 23% expect to add staff, down from 28% saying that in the spring.

What is deterring confidence and hiring? The surveys say future health-care costs and uncertainty surrounding the fiscal cliff, the combination of future tax increases and government spending cuts that may or may not take effect in early 2013.

“For these historically optimistic people to now be pessimistic in their general economic outlook really says a lot,” he said. “They’re feeling defeated.”

This pessimism isn’t uniquely American. Japan’s third-quarter Tankan survey showed a negative outlook among small enterprises. The U.K. Federation of Small Businesses registered a big drop in British confidence last quarter.

Wariness builds on itself. Weak output and hiring data create more reasons to worry, leading to future output and payroll cuts.

No wonder the International Monetary Fund cut its growth forecasts. The IMF now thinks global economic growth will be only 3.6% in 2013, down from 3.9% expected in the fund’s July forecast.

Most ominously, the IMF said the odds of a serious global slowdown (i.e., recession) are “alarmingly high.” The risks will become larger if the fiscal cliff isn’t averted.

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